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CHAPTER

Certificate in Accounting and Finance
Financial accounting and reporting II

4

Consolidated accounts:
Statements of financial position –
Basic approach
Contents
1 The nature of a group and consolidated accounts
2 Consolidated statement of financial position
3 Consolidation double entry

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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to broaden the knowledge base of basic accounting
acquired in earlier modules with emphasis on International Financial Reporting Standards.
LO 1

Prepare financial statements in accordance with the relevant law of the
country and in compliance with the reporting requirement of the
international pronouncements.

LO1.2.1

Describe the concept of a group as a single economic unit.

LO1.2.2

Define using simple examples subsidiary, parent and control

LO1.2.3

Describe situations when control is presumed to exist.

LO1.2.4

Identify and describe the circumstances in which an entity is required to
prepare and present consolidated financial statements

LO1.2.5

Eliminate (by posting journal entries) the carrying amount of the parent’s
investment in subsidiary against the parent’s portion of equity of subsidiary
and recognize the difference between the two balances as either goodwill; or
gain from bargain purchase.

LO1.3.1

Define and describe non- controlling interest in the case of a partially owned
subsidiary.

LO1.3.2

Identify the non-controlling interest in the net assets of a consolidated
subsidiary; and profit or loss of the consolidated subsidiary for the reporting
period.

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

1

THE NATURE OF A GROUP AND CONSOLIDATED ACCOUNTS
Section overview


Group as a single economic entity



A group of companies: parent and subsidiaries



Situations where control exists



Purpose and nature of consolidated financial statements



The requirement to prepare consolidated accounts



Sundry accounting issues

1.1 Group as a single economic entity
Illustration: Single economic entity
A Limited (a car manufacturer) buys 100% of B Limited (an automotive parts
manufacturer).
The 100% ownership gives A Limited complete control over B Limited.
A Limited’s business has changed as a result of buying B Limited.
It was a car manufacturer. Now it is a car manufacturer and a manufacturer of
automotive parts.
The two parts of the business are operated by two separate legal entities (A
Limited and B Limited). However, the two parts of the business are controlled by
the management of A Limited.
In substance, the two separate legal entities are a single economic entity.

IFRS contains rules that require the preparation of a special form of financial
statements (consolidated financial statements also known as group accounts) in
circumstances like the one described above.
This chapter explains some of the rules contained in the following standards:


IFRS 10: Consolidated financial statements



IFRS 3: Business combinations.

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1.2 A group of companies: parent and subsidiaries
Definitions: Group, parent and subsidiary
Group: A parent and its subsidiaries
Parent: An entity that controls one or more entities.
Subsidiary: An entity that is controlled by another entity.
A group consists of a parent entity and one or more entities that it has control
over. These are called subsidiaries.
The entity that ultimately controls all the entities in the group is called the parent.
Some parent companies have no assets at all except shares in the subsidiaries
of the group. A parent whose main assets (or only assets) are shares in
subsidiaries is sometimes called a holding company.
Control
An entity is a subsidiary of another entity if it is controlled by that other entity.
Definition: Control
An investor controls an investee when:
a. it is exposed, or has rights, to variable returns from its involvement with the
investee; and
b. it has the ability to affect those returns through its power over the investee.
In other words an investor controls an investee, if and only if, it has all the
following:


power over the investee;



exposure, or rights, to variable returns from its involvement with the
investee; and



ability to use its power over the investee to affect the amount of its returns

1.3 Situations where control exists
The above definition of control is quite complicated.
In practice, the vast majority of cases involve a company achieving control of
another through buying a controlling interest in its shares.
Furthermore, in the vast majority of cases obtaining a controlling interest means
buying shares which give the holder more than 50% of the voting rights in the
other company.

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Illustration: Wholly owned subsidiary
A owns 100% of B’s voting share capital.
A
100%
B

This 100% holding is described as a controlling
interest and gives A complete control of B.
B would be described as a wholly owned
subsidiary.

A company does not have to own all of the shares in another company in order to
control it.
Illustration: Partly owned subsidiary
A owns 80% of B’s voting share capital.
A
80%
B

This 80% holding is described as a controlling
interest and gives A complete control of B.
B would be described as a partly owned
subsidiary.
Other parties own the remaining 20% of the
shares. They have an ownership interest in B but
do not have control.
This is described as a non-controlling interest.
Non-controlling interest (NCI) is defined by IFRS
10 as: “the equity in a subsidiary not attributable
… to a parent.”

Control is assumed to exist when the parent owns directly, or indirectly through
other subsidiaries, more than half of the voting power of the entity, unless in
exceptional circumstances it can be clearly demonstrated that such control does
not exist.
Illustration:
A
60%
B
70%
C

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A owns a controlling interest in B.
B owns a controlling interest in C.
Therefore, A controls C indirectly through its
ownership of B.
C is described as being a sub-subsidiary of A.
Consolidation of sub-subsidiaries is not in this
syllabus

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In certain circumstances, a company might control another company even if it
owns shares which give it less than half of the voting rights. Such a company is
said to have de facto control over the other company. (De facto is a Latin phrase
which translates as of fact. It is used to mean in reality or to refer to a position
held in fact if not by legal right).
Illustration: Wholly owned subsidiary
A owns 45% of B’s voting share capital.
The other shares are held by a large number of unrelated investors none of whom
individually own more than 1% of B.
This 45% holding probably gives A complete
control of B.

A
45%
B

It would be unlikely that a sufficient number of
the other shareholders would vote together to
stop A directing the company as it wishes.

A company might control another company even if it owns shares which give it
less than half of the voting rights because it has an agreement with other
shareholders which allow it to exercise control.
Illustration: Wholly owned subsidiary
A owns 45% of B’s voting share capital.
A further 10% is held by A’s bank who have agreed to use their vote as directed by
A.
A
45%

This 45% holding together with its power to use
the votes attached to the banks shares gives A
complete control of B.

B

It was stated above but is worth emphasising that in the vast majority of cases
control is achieved through the purchase of shares that give the holder more than
50% of the voting rights in a company.

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

1.4 Purpose and nature of consolidated financial statements
An investment in a company is usually included in the statement of financial
position of the parent at cost. This does not reflect the substance of the situation.
The directors have control of the net assets of the subsidiary and use these to
generate profit.
To solve this problem IFRS requires that where a company holds a subsidiary it
must prepare group accounts in addition to its own accounts.
The type of group accounts specified by IFRS are called consolidations.
The purpose of consolidated financial statements is to provide financial
statements that have meaning and relevance to users. When a parent acquires a
subsidiary, both the parent and the subsidiary remain legally separate entities.
However, in practice they operate as if they were one organisation. Consolidated
financial statements reflect the reality (or substance) of the situation: the group is
a single economic unit.
In preparing consolidated financial statements:


the assets and liabilities of the parent and its subsidiaries are combined in a
single consolidated statement of financial position.



the profits of the parent and its subsidiaries, and their other comprehensive
income, are combined into a single in a consolidated statement of
comprehensive income

In other words a lot of the numbers in the consolidated financial statements are
constructed as a simple cross cast of the balance in the financial statements of
the parent and its subsidiary (or subsidiaries).
Example: Consolidated figures
Parent
Property, plant and
equipment
Inventory
Sales

Subsidiary

Consolidated

1,000

+

500

=

1,500

500

+

800

=

1,300

2,000

+

1,000

=

3,000

It is not always as straightforward as this. Sometimes there is a need for
adjustments in the cross cast. This will be explained later.
Note that the share capital and reserves for the consolidated balance sheet are
not calculated simply by adding the capital and reserves of all the companies in
the group!). This is explained later.

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1.5 The requirement to prepare consolidated accounts
IFRS 10 states that, with certain exceptions, a parent must present consolidated
financial statements in which it consolidates its investments in subsidiaries. In
other words, a parent must prepare consolidated financial statements for the
group as a whole.
Exception to this rule
There is an exception to this rule. This allows a parent that is itself a subsidiary
not to prepare consolidated financial statements.
A parent need not present consolidated financial statements if (and only if) all the
following conditions apply:


The parent itself (X) is a wholly-owned subsidiary, with its own parent (Y).
Alternatively, the parent (X) is a partially-owned subsidiary, with its own
parent (Y), and the other owners of X are prepared to allow it to avoid
preparing consolidated financial statements.



The parent’s debt or equity instruments are not traded in a public market.



The parent does not file its financial statements with a securities
commission for the purpose of issuing financial instruments in a public
market.



The parent’s own parent, or the ultimate parent company (for example, the
parent of the parent’s parent), does produce consolidated financial
statements for public use that comply with IFRS.

All subsidiaries
Consolidated financial statements must include all the subsidiaries of the parent
(IFRS 10). There are no grounds for excluding a subsidiary from consolidation.

1.6 Sundry accounting issues
Common reporting date
IFRS 10 requires that the financial statements of the parent and its subsidiaries
that are used to prepare the consolidated financial statements should all be
prepared with the same reporting date (the same financial year-end date), unless
it is impracticable to do so.
If it is impracticable for a subsidiary to prepare its financial statements with the
same reporting date as its parent, adjustments must be made for the effects of
significant transactions or events that occur between the dates of the subsidiary's
and the parent's financial statements. In addition, the reporting date of the parent
and the subsidiary must not differ by more than three months.
Uniform accounting policies
Since the consolidated accounts combine the assets, liabilities, income and
expenses of all the entities in the group, it is important that the methods used for
recognition and measurement of all these items should be the same for all the
entities in the group.
IFRS 10 therefore states that consolidated financial statements must be prepared
using uniform accounting policies. The policies used to prepare the financial
statements in all the entities in the group must be the same.

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

2

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Section overview


The basic approach



Example 1: To illustrate the basics



Pre- acquisition and post-acquisition profits



Goodwill



Non-controlling interest



Suggested step by step approach

2.1 The basic approach
Definition
Consolidated financial statements: The financial statements of a group presented
as those of a single economic entity.
The technique of consolidation involves combining the financial statements of the
parent and its subsidiaries. We will first explain how to consolidate the statement
of financial position. Consolidation of the statement of comprehensive income will
be covered in chapter 6.
Question structure
There are often two major stages in answering consolidation questions:


Stage 1 involves making adjustments to the financial statements of the
parent and subsidiary to take account of information provided. This might
involve correcting an accounting treatment that has been used in preparing
the individual company accounts.



Stage 2 involves consolidating the correct figures that you have produced.

The early examples used to demonstrate the consolidation technique look only at
step 2. It is assumed that the financial statements provided for the parent and its
subsidiary are correct.
Approach in this section
This section will demonstrate the techniques used to consolidate the statements
of financial position using a series of examples introducing complications one at a
time.
The examples will be solved using an approach that you might safely use to
answer exam questions. This approach is quick but it does not show how the
double entry works. The double entry will be covered in section 3 of this chapter
so that you are able to understand the flow of numbers in the consolidation and
able to prepare journal entries if asked to do so.

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Note the following features in following examples:


The asset in the parent’s statement of financial position representing the
cost of investment in the subsidiary disappears in the consolidation.



Each consolidated asset and liability is constructed by adding together the
balances from the statements of financial position of the parent and the
subsidiary.



The share capital (and share premium) in the consolidated statement of
financial position is always just the share capital (and share premium) of
the parent. That of the subsidiary disappears in the consolidation process.

Major workings
There are three major calculations to perform in preparing a consolidated
statement of financial position:


Calculation of goodwill



Calculation of consolidated retained earnings



Calculation of non-controlling interest

In order to calculate the above figures (all of which will be explained in the
following pages) information about the net assets of the subsidiary at the date of
acquisition and at the date of consolidation is needed.
This is constructed using facts about the equity balances (as net assets = equity).
Illustration: Net assets summary of the subsidiary
At date of
consolidation
X

At date of
acquisition
X

Share premium

X

X

Retained earnings*

X

X

Net assets

X

X

Share capital

* Retained earnings are also known as unappropriated profits or
accumulated profits.
You are not yet in a position to full understand this but all will be explained in the
following pages.

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

2.2 Example 1 - To illustrate the basics
Example:
P acquired 100% of the equity shares of S on incorporation of S (i.e. when S was
first established as a company).
The date of this transaction was 31 December 20X1 (this known as the date of
acquisition).
The cost of this investment was Rs. 120,000.
S had net assets (total assets minus total liabilities) when it was first set up of Rs.
120,000.
The statements of financial position P and S as at 31 December 20X1 (the date of
acquisition) were as follows.

Non-current assets:
Property, plant and equipment
Investment in S
Current assets
Equity
Share capital
Share premium
Retained earnings
Current liabilities

P

S

Rs.

Rs.

640,000
120,000
140,000

125,000
20,000

900,000

145,000

200,000
250,000
350,000
800,000
100,000

80,000
40,000
−
120,000
25,000

900,000

145,000

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financal position as 31 December 20X1
Non-current assets:
Property, plant and equipment
Current assets

(640,000 + 125,000)
(140,000 + 20,000)

Rs.
765,000
160,000
925,000

Equity
Share capital
Share premium
Retained earnings

(parent company only)
(parent company only)

Current liabilities

(100,000 + 25,000)

200,000
250,000
350,000
800,000
125,000
925,000

Note: In practice, there is no reason to prepare a consolidated statement of
financial position when a subsidiary is acquired. However, it is used here to
illustrate the basic principles of consolidation, before going on to consider what
happens after the subsidiary has been acquired.

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Observations
The asset in the parent’s statement of financial position representing the cost of
investment in the subsidiary disappears in the consolidation.
Each consolidated asset and liability is constructed by adding together the
balances from the statements of financial position of the parent and the
subsidiary.
The share capital (and share premium) in the consolidated statement of financial
position is always just the share capital (and share premium) of the parent. That
of the subsidiary disappears in the consolidation process.
Closing comment
The cost of investment was the same as the net assets acquired (Rs. 120,000).
This is very rarely the case. Usually there is a difference. This difference is called
goodwill. It will be explained later.

2.3 Pre- acquisition and post-acquisition profits
Subsidiaries are usually acquired after they have been in business for some time
rather than when they were incorporated.
This means that the acquired subsidiary will have retained earnings at the date of
the acquisition. These are called pre-acquisition profits.
Only profits earned by the subsidiary since the date of acquisition are included as
retained earnings in the consolidated financial statements. These are called postacquisition retained earnings.
Pre-acquisition profits of a subsidiary are not included as retained earnings in the
consolidated financial statements.
The working for the consolidated retained earnings balance is as follows:
Illustration: Consolidated retained earnings
Rs.
All of P’s retained earnings

X

P’s share of the post-acquisition retained earnings of S

X

Consolidated retained earnings

X

Other reserves
Sometimes a subsidiary has reserves other than retained earnings. The same
basic rules apply.
Only that part of a subsidiary’s reserve that arose after the acquisition date is
included in the group accounts (and then only the parent’s share of it).

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

Example:
P acquired 100% of the share capital of S on 1 January 20X1 for Rs. 200,000.
The balance on the retained earnings account of S was Rs. 80,000 at this date.
The statements of financial position P and S as at 31 December 20X1 were as
follows.
P
Rs.
Non-current assets:
Property, plant and equipment
Investment in S
Current assets
Equity
Share capital
Share premium
Retained earnings
Current liabilities

S
Rs.

680,000
200,000
175,000

245,000
90,000

1,055,000

335,000

150,000
280,000
470,000
900,000
155,000

30,000
90,000
140,000
260,000
75,000

1,055,000

335,000

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December
20X1
Rs.
Non-current assets:
Property, plant and equipment
(680,000 + 245,000)
925,000
Current assets
(175,000 + 90,000)
265,000
1,190,000
Equity
Share capital
Share premium
Consolidated retained earnings

(parent company only)
(parent company only)
(see working)

Current liabilities

(155,000 + 75,000)

150,000
280,000
530,000
960,000
230,000
1,190,000

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Example (continued): Workings
Net assets summary of S:
At date of
consolidation
30,000

At date of
acquisition
30,000

90,000

90,000

Retained earnings

140,000

80,000

Net assets

140,000

200,000

Share capital
Share premium

Post acqn

60,000

Rs.

Consolidated retained profits:
All of P’s retained earnings

470,000

P’s share of the post-acquisition retained
earnings of S (100% of 60,000 (see above))

60,000
530,000

Observations
The asset in the parent’s statement of financial position representing the cost of
investment in the subsidiary disappears in the consolidation.
Each consolidated asset and liability is constructed by adding together the
balances from the statements of financial position of the parent and the
subsidiary.
The share capital (and share premium) in the consolidated statement of financial
position is always just the share capital (and share premium) of the parent. That
of the subsidiary disappears in the consolidation process.
The consolidated retained profits is made up of the parent’s retained profits plus
the parent’s share of the growth in the subsidiary’s retained profits since the date
of acquisition.
Closing comment
The cost of investment was the same as the net assets acquired (Rs. 120,000).
This is very rarely the case. Usually there is a difference. This difference is called
goodwill. It will be explained later.

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2.4 Goodwill
In each of the two previous examples the cost of investment was the same as the
net assets of the subsidiary at the date of acquisition.
In effect what has happened in both examples is the cost of investment has been
replaced by the net assets of the subsidiary as at the date of acquisition.
The net assets have grown since acquisition to become the net assets at
consolidation. These have been included as part of the net assets of the group,
but remember that the consolidated retained earnings includes the parent’s share
of post-acquisition retained earnings so everything balances.
Do not worry if this is not obvious to you. The double entry is explained in section
3 of this chapter.
In almost all cases the cost of investment will be different to the net assets
purchased. The difference is called goodwill.
Definition: Goodwill
Goodwill: An asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
separately recognised.
When a parent buys a subsidiary the price it pays is not just for the assets in the
statement of financial position. It will pay more than the value of the assets
because it is buying the potential of the business to make profit.
The amount it pays in excess of the value of the assets is for the goodwill.
IFRS 3 Business combinations, sets out the calculation of goodwill as follows:
Illustration: Goodwill
N.B. All balances are as at the date of acquisition.
Rs.
Consideration transferred (cost of the business combination)

X

Non-controlling interest

X
X

The net of the acquisition date amounts of identifiable
assets acquired and liabilities assumed (measured in
accordance with IFRS 3)

X

Goodwill recognised

X

The above calculation compares the total value of the company represented by
what the parent has paid for it and the non-controlling interest to the net assets
acquired at the date of acquisition.
The guidance requires the net of the acquisition date amounts of identifiable
assets acquired and liabilities assumed (measured in accordance with IFRS
3). This will be explained later.
The guidance also refers to non-controlling interest. This will be explained later
but first we will present an example where there is no non-controlling interest.

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Example:
P acquired 100% of S on 1 January 20X1 for Rs. 230,000.
The retained earnings of S were 100,000 at that date.
The statements of financial position P and S as at 31 December 20X1 were as
follows:

Assets:
Investment in S, at cost
Other assets
Equity
Share capital
Share premium
Retained earnings
Current liabilities

P
Rs.

S
Rs.

230,000
570,000
800,000

240,000
240,000

200,000
100,000
440,000
740,000
60,000
800,000

50,000
20,000
125,000
195,000
45,000
240,000

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December
20X1
Rs.
Assets
Goodwill (see working)
Other assets (570 + 240)
Total assets
Equity
Share capital (P only)
Share premium (P only)
Consolidated retained earnings (see working)
Current liabilities (60 + 40)
Total equity and liabilities

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60,000
810,000
870,000
200,000
100,000
465,000
765,000
105,000
870,000

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

Example (continued): Net assets summary of S
At date of
consolidation
50,000

At date of
acquisition
50,000

20,000

20,000

Retained earnings

125,000

100,000

Net assets

195,000

170,000*

Share capital
Share premium

Post acqn

25,000

Rs.

Goodwill
Cost of investment

230,000

Non-controlling interest

nil
230,000

Net assets at acquisition 100% of 170,000*
(see above)

(170,000)
60,000
Rs.

Consolidated retained profits:
All of P’s retained earnings
P’s share of the post-acquisition retained
earnings of S (100% of 25,000 (see above))

440,000
25,000
465,000

Observations
The asset in the parent’s statement of financial position representing the cost of
investment in the subsidiary disappears in the consolidation. It is taken into the
goodwill calculation.
Each consolidated asset and liability is constructed by adding together the
balances from the statements of financial position of the parent and the
subsidiary.
The share capital (and share premium) in the consolidated statement of financial
position is always just the share capital (and share premium) of the parent. That
of the subsidiary disappears in the consolidation process.
The consolidated retained profits is made up of the parent’s retained profits plus
the parent’s share of the growth in the subsidiary’s retained profits since the date
of acquisition.
Accounting for goodwill
Goodwill is recognised as an asset in the consolidated financial statements.
It is not amortised but is tested for impairment on an annual basis.

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2.5 Non-controlling interest
When a parent entity acquires less than 100% of the equity shares in a
subsidiary, the remainder of the shares in the subsidiary are held by other
shareholders. These are called the non-controlling interest (NCI) in the
subsidiary. The abbreviation NCI is used for non-controlling interests.
For example, P might acquire 60% of the shares in S.


It has acquired 60% of the ‘equity’ ownership of S.



The remaining 40% of the equity in S is owned by the non-controlling
interest.

Non-controlling interest (NCI) is defined by IFRS 10 as: ‘the equity in a subsidiary
not attributable … to a parent.’
All of the assets and liabilities of S are consolidated just as before. However, part
of the net assets that have been consolidated belongs to the NCI. A figure for the
NCI is recognised in equity to show their ownership interest in the net assets.
Measuring the NCI
The NCI at the reporting date made up as follows:
Illustration: Consolidated retained earnings
Rs.
X

NCI at the date of acquisition
NCI’s share of the post-acquisition retained earnings of S

X

NCI’s share of each other post-acquisition reserves of S (if any)

X

Consolidated retained earnings

X

There are two ways of measuring the NCI at the date of acquisition.


As a percentage of the net assets of the subsidiary at the date of
acquisition; or



At fair value as at the date of acquisition.

The first technique is the easier of the two because it allows for the use of a short
cut. Also, it is far the more common in practice.
The different approaches will obviously result in a different figure for NCI but
remember that the NCI at acquisition is also used in the goodwill calculation. This
is affected also.

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

Example:
P acquired 80% of S on 1 January 20X1 for Rs. 230,000.
The retained earnings of S were 100,000 at that date.
It is P’s policy to recognise non-controlling interest at the date of acquisition as a
proportionate share of net assets.
The statements of financial position P and S as at 31 December 20X1 were as
follows

Assets:
Investment in S, at cost
Other assets
Equity
Share capital
Share premium
Retained earnings
Current liabilities

P
Rs.

S
Rs.

230,000
570,000
800,000

240,000
240,000

200,000
100,000
440,000
740,000
60,000
800,000

50,000
20,000
125,000
195,000
45,000
240,000

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December
20X1
Rs.
Assets
Goodwill (see working)
Other assets (570 + 240)
Total assets
Equity
Share capital (P only)
Share premium (P only)
Consolidated retained earnings (see working)
Non-controlling interest (see working)
Current liabilities (60 + 40)
Total equity and liabilities

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94,000
810,000
904,000
200,000
100,000
460,000
760,000
39,000
799,000
105,000
904,000

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Financial accounting and reporting II

Example (continued): Net assets summary of S
At date of
consolidation
50,000

At date of
acquisition
50,000

20,000

20,000

Retained earnings

125,000

100,000

Net assets

195,000*

170,000

Share capital
Share premium

Non-controlling interest
NCI’s share of net assets at the date of acquisition
(20% × 170,000)
NCI’s share of the post-acquisition retained earnings of
S (20% of 25,000 (see above))

Post acqn

25,000

Rs.
34,000
5,000

NCI’s share of net assets at the date of consolidation

39,000

Goodwill

Rs.

Cost of investment

230,000

Non-controlling interest at acquisition

34,000
264,000

Net assets at acquisition (see above)

(170,000)
94,000
Rs.

Consolidated retained profits:
All of P’s retained earnings
P’s share of the post-acquisition retained earnings of S
(80% of 25,000 (see above))

440,000
20,000
460,000

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The NCI at the date of consolidation has been calculated as NCI share of net
assets at acquisition plus the NCI share of profit since the date of acquisition.
NCI share of profit since the date of acquisition is the same as the NCI share of
net assets since the date of acquisition.
Therefore the NCI at the date of consolidation is simply the NCI share of net
assets at the date of consolidation.
Example (continued): Net assets summary of S
At date of
consolidation
50,000

At date of
acquisition
50,000

20,000

20,000

Retained earnings

125,000

100,000

Net assets

195,000*

170,000

Share capital
Share premium

Post acqn

25,000

Non-controlling interest

Rs.

NCI’s share of net assets at the date of consolidation
(20% × 195,000*)

39,000

This short cut is not available if the NCI at acquisition is measured at fair value.

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NCI at fair value at the date of acquisition
Example: NCI at date of acquisition measured at fair value
Continuing the earlier example with the extra information that the fair value of the
NCI at acquisition was 40,000.
Net assets summary of S
At date of
consolidation

At date of
acquisition

Share capital

50,000

50,000

Share premium

20,000

20,000

Retained earnings

125,000

100,000

Net assets

195,000

170,000

Post acqn

25,000

Figures under both methods are shown so that you can see the difference
between the two.

Non-controlling interest

NCI at fair
value

NCI as
share of
net assets

Rs.

Rs.

NCI at the date of acquisition
at fair value

40,000

share of net assets (20% × 170,000)
NCI’s share of the post-acquisition
retained earnings of S
(20% of 25,000 (see above))

5,000

5,000

NCI’s share of net assets at the date of
consolidation

45,000

39,000

Goodwill
Cost of investment
Non-controlling interest at acquisition
Net assets at acquisition (see above)

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34,000

Rs.

Rs.

230,000

230,000

40,000

34,000

270,000

264,000

(170,000)

(170,000)

100,000

94,000

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

2.6 Suggested step by step approach
To prepare a consolidated statement of financial position as at the acquisition
date, the following steps should be taken.
Step 1. Establish the group share (parent company share) in the subsidiary and
the percentage owned by non-controlling interests.
Step 2: Perform double entry to record any individual company adjustments that
might be necessary. Mark these in the face of the question. The information can
be lifted into workings later so that the marker can understand what you have
done.
Step 3: Set out a pro-forma (skeleton) statement of financial position and fill in
the easy numbers (for example those assets and liabilities that are a straight
cross cast and the share capital)
Step 4. Calculate the net assets of the subsidiary S at the acquisition date and at
the end of the reporting period
Step 5. Calculate the goodwill
Step 6. Calculate the non-controlling interest.
Step 7. Calculate consolidated retained earnings.

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3

CONSOLIDATION DOUBLE ENTRY
Section overview


Calculating goodwill



Calculating NCI



Calculating consolidated retained earnings



Tutorial note

Introductory comment
The learning outcomes include a requirement to prepare journals necessary to
calculate goodwill and non-controlling interest.
Usually journals are prepared to process changes in the general ledger. This is
not the case of the journals in this section. There is no general ledger for the
group accounts. Consolidated financial statements are prepared from
independent sets of financial statements which are extracted from separate
general ledgers. Information from these independent financial statements is
transferred to working papers where the consolidation is performed.
The journals described in this refer to adjustments made to numbers in those
working papers.

3.1 Calculating goodwill
The cost of investment account is renamed the cost of control account. This is
the account used to calculate goodwill.
P’s share of net assets is compared with the cost of investment in this account by
transferring in P’s share of each of S’s equity balances at the date of acquisition.
Illustration:
Debit
Share capital of S

Credit

40,000

Cost of control

40,000

Being: Transfer of P’s share of S’s share capital to cost of control account
as at the date of acquisition (80% of 50,000)
Share premium of S

16,000

Cost of control

16,000

Being: Transfer of P’s share of S’s share premium to cost of control
account as at the date of acquisition (80% of 20,000)
Retained earnings of S

80,000

Cost of control

80,000

Being: Transfer of P’s share of S’s retained earnings to cost of control
account as at the date of acquisition (80% of 100,000)

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The balance on the cost of control account is the goodwill figure.
Example:
Cost of control (goodwill)
Rs.
Cost of investment

Rs.

1) P’s share of S’s share
capital
230,000
2) P’s share of S’s share
premium
3) P’s share of S’s
retained earnings at
acquisition

40,000
16,000

80,000

Balance c/d

94,000

230,000
Balance b/d

230,000

94,000

3.2 Calculating NCI
The NCI’s share of net assets of S is constructed by transferring in their share of
each of S’s equity balances at the date of consolidation into an NCI account.
Illustration:
Debit
Share capital of S

Credit

10,000

Cost of control

10,000

Being: Transfer of NCI’s share of S’s share capital as at the date of
acquisition to cost of control account (20% of 50,000)
Share premium of S

4,000

Cost of control

4,000

Being: Transfer of NCI’s share of S’s share premium as at the date of
acquisition to cost of control account (20% of 20,000)
Retained earnings of S

25,000

Cost of control

25,000

Being: Transfer of NCI’s share of S’s retained earnings as at the date of
acquisition to cost of control account (20% of 125,000)

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The balance on this account is the non-controlling interest
Example:
Non-controlling interest
Rs.

Rs.
4) NCI’s share of S’s
share capital
(20% of 50,000)
5) NCI’s share of S’s
share premium
(20% of 20,000)

Balance b/d

10,000

4,000

6) NCI’s share of S’s
retained earnings
39,000
(20% of 125,000)

25,000

39,000

39,000
39,000

Balance b/d

3.3 Calculating consolidated retained earnings
P’s share of S’s retained earnings since the date of acquisition is credited to the
P’s retained earnings account.
Illustration:
Debit
Retained earnings of S

Credit

20,000

P’s retained earnings

20,000

Being: Transfer of P’s share of post-acquisition profits of S into retained
earnings. (80% of (125,000 – 100,000))

The balance on this account is the consolidated retained earnings.
Example (continued):
Retained earnings
Rs.

Rs.
P’s balance
P’s share of S’s

Balance b/d

460,000
460,000

460,000
Balance b/d

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440,000
20,000

150

460,000

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Chapter 4: Consolidated accounts: Statements of financial position - Basic approach

3.4 Tutorial note
The balances on S’s share capital, share premium and retained earnings have all
been removed elsewhere.
Example (continued):
Share capital (of S)
Rs.
P’s share at acquisition
(to cost of control)
S’s share (to NCI)

Rs.

40,000 Balance b/d
10,000

50,000

50,000

50,000

Share premium (of S)
Rs.
P’s share at acquisition
(to cost of control)
S’s share (to NCI)

Rs.

16,000 Balance b/d
4,000

20,000

20,000

20,000

Retained earnings (of S)
Rs.
P’s share at acquisition
(to cost of control)
P’s share since
acquisition
(consolidated retained
profits)
S’s share (to NCI)

80,000 Balance b/d

125,000

20,000
25,000
125,000

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151

125,000

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Financial accounting and reporting II

Practice question
H Ltd acquired 80% of S Ltd several years ago for Rs. 30 million.
The balance on S Ltd’s retained earnings was Rs. 5,000,000 at the date of
acquisition.
H Ltd’s policy is to measure non-controlling interest at the date of acquisition
as a proportionate share of net assets.
The draft statements of financial position of the two companies at 31
December are:
H (Rs. 000 )
S (Rs. 000)
Non-current assets:
Property, plant and equipment
45,000
15,000
Investment in S
Current assets
Total assets
Equity
Share capital
Retained earnings
Non-current liabilities
Current liabilities
Total equity and liabilities

30,000
28,000

nil
12,000

103,000

27,000

5,000
76,000

1,000
10,000

81,000

11,000

2,000
20,000

6,000
10,000

103,000

27,000

1

Prepare a consolidated statement of financial position as at 31 December.

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SOLUTIONS TO PRACTICE QUESTIONS
1

Solutions
H Group: Consolidated statement of financial position at 31 December 20X1
Rs.
Assets
Goodwill (W3)
Property, plant and equipment (45,000 + 15,000)
Current assets (28,000 + 12,000)
Total assets

125,200

Equity
Share capital
Retained earnings (W4)
Non-controlling interest (W2)
Non-current liabilities (2,000 + 6,000)
Current liabilities (20,000 + 10,000)
Total equity and liabilities

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25,200
60,000
85,200
40,000

5,000
80,000
85,000
2,200
87,200
8,000
30,000
125,200

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1

Solution: Workings
W1: Net assets summary of S
At date of
Consolidation
Acquisition
Share capital

1,000

1,000

Retained earnings

10,000

5,000

Net assets

11,000

6,000

Post acqn
5,000

Rs.000

W2: Non-controlling interest
NCI’s share of net assets at the date of acquisition
(20% × 6,000)

1,200

NCI’s share of the post-acquisition retained earnings of S
(20% of 5,000 (see above))

1,000

NCI’s share of net assets at the date of consolidation

2,200
Rs. 000

W3: Goodwill
Cost of investment

30,000

Non-controlling interest at acquisition (20% × 6,000)

1,200
31,000

Net assets at acquisition (see above)

(6,000)

Recoverable amount of goodwill

25,200
Rs.

W4: Consolidated retained profits:
All of H’s retained earnings

76,000

H’s share of the post-acquisition retained earnings of S
(80% of 5,000 (see above))

4,000
80,000

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CHAPTER

Certificate in Accounting and Finance
Financial accounting and reporting II

5

Consolidated accounts:
Statements of financial position Complications
Contents
1 Possible complications: Before consolidation
2 Possible complications: During consolidation
3 Possible complications: after consolidation

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Financial accounting and reporting II

INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to broaden the knowledge base of basic accounting
acquired in earlier modules with emphasis on International Financial Reporting Standards.
LO 1

Prepare financial statements in accordance with the relevant law of the
country and in compliance with the reporting requirement of the
international pronouncements.

LO1.4.1

Post adjusting entries to eliminate the effects of intergroup sale of inventory
and depreciable assets.

LO1.5.1

Prepare and present simple consolidated statements of financial position
involving a single subsidiary in accordance with IFRS 10.

LO1.6.1

Prepare and present a simple consolidated statement of comprehensive
income involving a single subsidiary in accordance with IFRS 10.

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

1

POSSIBLE COMPLICATIONS: BEFORE CONSOLIDATION
Section overview


Acquisition-related costs



Acquired intangible assets



Fair value exercise at acquisition

1.1 Acquisition-related costs
Acquisition-related costs are costs the acquirer incurs to effect a business
combination. They include advisory, legal, accounting, valuation and other
professional or consulting fees.
These costs are not capitalised as part of the cost of acquisition but expensed in
the periods in which they are incurred. (This is different rule to that which applies
to the purchase of property, plant and equipment or intangibles).
A question may incorrectly capitalise the costs. You would have to correct this
before consolidating.

1.2 Acquired intangible assets
A question might provide information about an unrecognised asset of the
subsidiary. You would have to include the asset in the subsidiary’s financial
statements before consolidating them.
Reason
Goodwill is recognised by the acquirer as an asset from the acquisition date.
It is initially measured as the difference between:


the cost of the acquisition plus the non-controlling interest; and



the net of the acquisition date amounts of identifiable assets acquired and
liabilities assumed (measured in accordance with IFRS 3).

When a company acquires a subsidiary, it may identify intangible assets of the
acquired subsidiary, which are not included in the subsidiary’s statement of
financial position. If these assets are separately identifiable and can be measured
reliably, they should be included in the consolidated statement of financial
position as intangible assets, and accounted for as such.
This can result in the recognition of assets and liabilities not previously
recognised by the acquiree.
Illustration:
If a company bought 100% of the Coca-Cola Corporation they would be buying a lot
of assets but part (perhaps the largest part) of the purchase consideration would
be to buy the Coca Cola brand.
Coca Cola does not recognise its own brand in its own financial statements
because companies are not allowed to recognised internally generated brands.
However, as far as the company buying the Coca-Cola Corporation is concerned the
brand is a purchased asset. It would be recognised in the consolidated financial
statements and would be taken into account in the goodwill calculation.

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Example:
P bought 80% of S 2 years ago.
At the date of acquisition S’s retained earnings stood at Rs. 600,000. The fair value
of its net assets was not materially different from the book value except for the
fact that it had a brand which was not recognised in S’s accounts. This had a fair
value of 100,000 at this date and an estimated useful life of 20 years.
The statements of financial position P and S as at 31 December 20X1 were as
follows:
P
S
Rs.
Rs.
PP and E

1,800,000

Investment in S

1,000,000

Other assets

400,000

300,000

3,200,000

1,300,000

100,000

100,000

2,900,000

1,000,000

200,000

200,000

3,200,000

1,300,000

Share capital
Retained earnings

1,000,000

Liabilities

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December
20X1
Rs.
Assets
Brand (see working)
Goodwill (see working)
Property, plant and equipment (1,800 + 1000)
Other assets (400 + 300)
Total assets
Equity
Share capital (P only)
Consolidated retained earnings (see working)
Non-controlling interest
Current liabilities (200 + 200)
Total equity and liabilities

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90,000
360,000
2,800,000
700,000
3,950,000
100,000
3,212,000
3,312,000
238,000
3,550,000
400,000
3,950,000

The Institute of Chartered Accountants of Pakistan

Chapter 5: Consolidated accounts: Statements of financial position - Complications

Example (continued):
Net assets summary of S

Share capital

At date of
consolidation
100,000

At date of
acquisition
100,000

1,000,000

600,000

Post
acqn

Retained earnings
Given in the question
Extra depreciation on
brand
(100,000 × 2 years/20 years)

990,000

�
600,000

100,000

100,000

1,190,000

800,000

(10,000)

Consolidation reserve on
recognition of the brand
Net assets

Non-controlling interest
NCI’s share of net assets at the date of acquisition
(20% �800,000)
NCI’s share of the post-acquisition retained earnings of
S (20% of 390,000 (see above))
NCI’s share of net assets at the date of consolidation

390,00
0

Rs.
160,000
78,000
238,000
Rs.

Goodwill
Cost of investment

1,000,000

Non-controlling interest at acquisition (20% �800,000)

160,000
1,160,000

Net assets at acquisition (see above)

(800,000)
360,000
Rs.

Consolidated retained profits:
All of P’s retained earnings
P’s share of the post-acquisition retained earnings of S
(80% of 390,000 (see above))

2,900,000
312,000
3,212,000
Rs.

Brand
On initial recognition

100,000

Depreciation since acquisition (100,000 ×

2 years/20 years)

(10,000)
90,000

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1.3 Fair value exercise at acquisition
A question might provide information about the fair value of a subsidiary’s assets
at the date of acquisition. You might have to revalue the assets in the
subsidiary’s financial statements before consolidating them.
Reason
Goodwill is recognised by the acquirer as an asset from the acquisition date.
It is initially measured as the difference between:


the cost of the acquisition plus the non-controlling interest; and



the net of the acquisition date amounts of identifiable assets acquired and
liabilities assumed (measured in accordance with IFRS 3).

IFRS 3 requires that most assets and liabilities be measured at their fair value.
Definition: Fair value
Fair value: The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.

In every example so far it has been assumed that the fair value of the assets and
liabilities of the subsidiary were the same as their book value as at the date of
acquisition. In practice this will not be the case.
In other cases a question will include information about the fair value of an asset
or assets as at the date of acquisition.
The net assets of a newly acquired business are subject to a fair valuation
exercise.
Where the subsidiary has not reflected fair values at acquisition in its accounts,
this must be done before consolidating. Note that this is almost always the case
Revaluation upwards:
The asset is revalued in the consolidation working papers (not in the general
ledger of the subsidiary). The other side of the entry is taken to a fair value
reserve as at the date of acquisition. This will appear in the net assets working
and therefore become part of the goodwill calculation.
The reserve is also included in the net assets working at the reporting date if the
asset is still owned by the subsidiary.
If a depreciable asset is revalued the post-acquisition depreciation must be
adjusted to take account of the change in the value of the asset being
depreciated.
Revaluation downwards
Write off the amount to retained earnings in the net assets working (book value
less fair value of net assets at acquisition) at acquisition and at the reporting date
if the asset is still owned.

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

Example:
P bought 80% of S 2 years ago.
At the date of acquisition S’s retained earnings stood at Rs. 600,000 and the fair
value of its net assets were Rs. 1,000,000. This was Rs. 300,000 above the book
value of the net assets at this date.
The revaluation was due to an asset that had a remaining useful economic life of
10 years as at the date of acquisition.
The statements of financial position P and S as at 31 December 20X1 were as
follows:
P
S
Rs.
PP and E

1,800,000

Investment in S

1,000,000

Other assets

Share capital
Retained earnings
Liabilities

Rs.
1,000,000

400,000

300,000

3,200,000

1,300,000

100,000

100,000

2,900,000

1,000,000

200,000

200,000

3,200,000

1,300,000

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December
20X1
Rs.
Assets
Goodwill (see working)
PP and E (see working)
Other assets (400,000 + 300,000)
Total assets
Equity
Share capital (P only)
Consolidated retained earnings (see working)
Non-controlling interest
Current liabilities (200 + 200)
Total equity and liabilities

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200,000
3,040,000
700,000
3,940,000
100,000
3,172,000
3,272,000
268,000
3,540,000
400,000
3,940,000

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Financial accounting and reporting II

Example (continued):
Net assets summary of S

Share capital

At date of
consolidation
100,000

At date of
acquisition
100,000

Post acqn

Retained earnings
Given in the question
Extra depreciation on
fair value adjustment
(300 × 2 years/10 years) –
see explanation on
next page
Fair value reserve
Net assets

1,000,000

600,000

(60,000)
940,000

�
600,000

300,000

300,000

1,340,000

1,000,000

Non-controlling interest
NCI’s share of net assets at the date of acquisition
(20% �1,000)
NCI’s share of the post-acquisition retained earnings of
S (20% of 340 (see above))
NCI’s share of net assets at the date of consolidation

340,000

Rs.
200,000
68,000
268,000
Rs.

Goodwill
Cost of investment

1,000,000

Non-controlling interest at acquisition (20% �1,000)

200,000
1,200,000

Net assets at acquisition (see above)

(1,000,000)
200,000
Rs.

Consolidated retained profits:
All of P’s retained earnings
P’s share of the post-acquisition retained earnings of S
(80% of 340 (see above))

2,900,000
272,000
3,172,000

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

Example (continued): Net assets summary of S
Rs.

Property plant and equipment
Parent’s

1,800

Subsidiary’s
Given in question

1,000

Fair value adjustment

300

Extra depreciation on fair value adjustment
(300 × 2 years/10 years)

(60)
1,240

To statement of financial position

3,040

Explanation of extra depreciation
If a depreciable asset is revalued (which is usually the case) the post-acquisition
depreciation must be adjusted to take account of the change in the value of the
asset being depreciated.
In this example, two years ago the subsidiary had an asset which had a fair value
Rs.300,000 greater than its book value. This valuation was not recorded in the
financial statements of the subsidiary so the subsidiary’s figures need to be
retrospectively adjusted, for the purposes of consolidation, at each year end.
Depreciation of an asset is based on its carrying amount. Depreciation of an
asset increases when it is revalued. Therefore, the extra depreciation necessary
as a result of the fair value adjustment is Rs. 30,000 per annum (Rs. 300,000/10 years).
The acquisition was 2 years ago so extra depreciation of Rs. 60,000 (Rs. 30,000
× 2 years) must be recognised retrospectively.

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2

POSSIBLE COMPLICATIONS: DURING CONSOLIDATION
Section overview


Mid-year acquisitions



Types of intra-group transaction



The need to eliminate intra-group transactions on consolidation



Unrealised profit – Inventory



Unrealised profit – Transfers of non-current assets

2.1 Mid-year acquisitions
Goodwill is measured at the date of acquisition of the subsidiary.
H may not acquire S at the start or end of a year. If S is acquired mid-year, it is
necessary to calculate the net assets at date of acquisition in order to calculate
goodwill, non-controlling interest and consolidated retained earnings.
This usually involves calculating the subsidiary’s retained earnings at the date of
acquisition. The profits of the subsidiary are assumed to accrue evenly over time
unless there is information to the contrary.
Illustration: Retained earnings at the date of acquisition
Retained earnings at the start of the year

Rs.
X

Retained earnings for the year up to the date of acquisition

X

Retained earnings at the date of acquisition

X

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

Example:
P bought 70% of S on 31st March this year.
S’s profit for the year was Rs. 12,000
The statements of financial position P and S as at 31 December 20X1 were as
follows:
P
S
Rs.
PP and E

Rs.

100,000

20,000

Investment in S

50,000

Other assets

30,000

12,000

180,000

32,000

10,000

1,000

160,000

30,000

10,000

1,000

180,000

32,000

Share capital
Retained earnings
Liabilities

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December
20X1
Rs.
Assets
Goodwill (see working)
PP and E (100,000 + 20,000)
Other assets (30,000 + 12,000)
Total assets
Equity
Share capital (P only)
Consolidated retained earnings (see working)
Non-controlling interest
Current liabilities (10,000 + 1,000)
Total equity and liabilities

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34,600
120,000
42,000
196,600
10,000
166,300
176,300
9,300
185,600
11,000
196,600

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Financial accounting and reporting II

Example (continued):
Net assets summary of S

Share capital

At date of
consolidation
1,000

At date of
acquisition
1,000

Post acqn

Retained earnings
Given in the question

30,000

See working below
Net assets

21,000
30,000

21,000

31,000

22,000

9,000

Retained earnings of the subsidiary as at the date of acquisition
Rs.
Retained earnings at the start of the year
Retained earnings at the end of the year

30,000)

Less: profit for the year

(12,000)
18,000

Profit from the start of the year to the date of acquisition
(3/12 �12,000)

3,000

NCI’s share of net assets at the date of consolidation

21,000

Non-controlling interest

Rs.

NCI’s share of net assets at the date of acquisition
(30% �22,000)

6,600

NCI’s share of the post-acquisition retained earnings of S
(30% of 9,000 (see above))

2,700

NCI’s share of net assets at the date of consolidation

9,300

Goodwill

Rs.

Cost of investment

50,000

Non-controlling interest at acquisition (30% �22,000)

6,600
56,600

Net assets at acquisition (see above)

(22,000)
34,600
Rs.

Consolidated retained profits:
All of P’s retained earnings

160,000

P’s share of the post-acquisition retained earnings of S
(70% of 9,000 (see above))

6,300
166,300

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

2.2 Types of intra-group transaction
In many groups, business and financial transactions take place between entities
within the group. These ‘intra-group’ transactions might be:


the sale of goods or services between the parent and a subsidiary, or
between two subsidiaries in the group



transfers of non-current assets between the parent and a subsidiary, or
between two subsidiaries in the group



the payment of dividends by a subsidiary to the parent (or by one
subsidiary to another subsidiary)



loans by one entity in the group to another, and the payment of interest on
intra-group loans.

2.3 The need to eliminate intra-group transactions on consolidation
Intra-group transactions should be eliminated on consolidation. In other words,
the effects of intra-group transactions must be removed from the financial
statements on consolidation.
The purpose of consolidated accounts is to show the financial position and the
financial performance of the group as a whole, as if it is a single operating unit. If
intra-group transactions are included in the consolidated financial statements, the
statements will show too many assets, liabilities, income and expenses for the
group as a single operating unit.
The consolidated financial statements represent the financial position and
performance of a group of companies as if they are a single economic entity. A
single economic entity cannot owe itself money!
IFRS 10 therefore requires that:


Intra-group balances and transactions, including income, expenses and
dividends, must be eliminated in full.



Profits or losses resulting from intra-group transactions that are recognised
in inventory or non-current assets must be eliminated in full.

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Financial accounting and reporting II

Example: Elimination of intra-group transactions on consolidation
H owns 80% of S. H sells goods to S.

P

S

Adjustment
Dr
Cr

Consolidated
statement of
financial
position

Receivables:
From S

1,000

1,000

�

Payables:
To H

1,000

1,000

�

The above adjustment is simply a cancellation of the inter-company receivable in
one group member’s statement of financial position against the inter-company
payable in another group member’s statement of financial position.
Items in transit
At the year-end current accounts may not agree, owing to the existence of intransit items such as goods or cash.
The usual convention followed is to follow the item through to its ultimate
destination and adjust the books of the ultimate recipient.

2.4 Unrealised profit – Inventory
Inter-company balances are cancelled on consolidation. The main reason for
these arising is inter company (or intra group) trading. The other example you will
come across is inter-company transfers of non-current assets.
If a member of a group sells inventory to another member of the group and that
inventory is still held by the buying company at the year end:


The company that made the sale will show profit in its own accounts.
�



This is fine from the individual company viewpoint but the profit has
not been realised by the group.

The company that made the purchase will record the inventory at cost to
itself.
�

This is fine from the individual company view but consolidation of this
value will result in the inclusion in the financial statements of a figure
which is not at cost to the group.

IFRS 10 requires that the unrealised profit be removed in full from the closing
inventory valuation. It gives no further guidance on how this should be done.

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

This is an inventory valuation adjustment and can be processed in the
consolidated financial statements.
Illustration:
Debit
X

Closing inventory – Statement of comprehensive income

Credit

Closing inventory – Statement of financial position

X

There is a complication to think about. If S is the selling company the purpose of
the above adjustment is to reduce the profit of the subsidiary because there is
unrealised profit on the inter-company transaction and reduce the inventory held
by P as it is not at cost to the group.
If the profit of the subsidiary is being reduced then NCI should share in that
reduction. This implies a second journal as follows:
Illustration:
NCI in the statement of financial position

Debit
X

NCI in the statement of comprehensive income

Credit
X

With their share of the adjustment

The two journals can be combined as follows to produce a composite adjustment
in questions which only require the preparation of the statement of financial
position.
Illustration:
Debit
X

Consolidated retained earnings
NCI in the statement of financial position
Closing inventory – Statement of financial position

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Credit

X
X

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Financial accounting and reporting II

Example:
P bought 80% of S 2 years ago. At the date of acquisition S’s retained earnings
stood at Rs. 1,600
During the year S sold goods to H for Rs. 20,000 which gave S a profit of Rs. 8,000.
H still held 40% of these goods at the year end.
The statements of financial position P and S as at 31 December 20X1 were as
follows:
P
S
PP and E

Rs.

Rs.

100,000

41,000

Investment in S
Other assets

50,000
110,000

50,000

260,000

91,000

50,000

30,000

200,000

56,000

10,000

5,000

260,000

91,000

Share capital
Retained earnings
Liabilities

A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December 20X1
Assets
Rs.
Goodwill (see working)
13,200
PP and E (100,000 + 41,000)
141,000
Other assets (110,000 + 50,000 – 3,200)
156,800
Total assets
311,000
Equity
Share capital (P only)
50,000
Consolidated retained earnings (see working)
229,440
279,440
Non-controlling interest
16,560
296,000
Current liabilities (10,000 + 5,000)
15,000
Total equity and liabilities
311,000

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

Example (continued):
Net assets summary of S
At date of
consolidation
30,000

At date of
acquisition
30,000

Post acqn

Given in the question

56,000

16,000

40,000

Net assets

82,800

46,000

Share capital
Retained earnings

Unrealised profit
Rs.
Total profit on transaction
Inventory held at year end (therefore the profit on this is
unrealised by the group)

8,000

Adjustment

3,200

Double entry in consolidated financial statements
Consolidated retained earnings (80% �3,200)
NCI – Statement of financial position (20% �3,200)

40%

Dr

Cr

2,560
640

Closing inventory – Statement of financial position

3,200

Non-controlling interest

Rs.

NCI’s share of net assets at the date of acquisition
(20% �46,000)

9,200

NCI’s share of the post-acquisition retained earnings of
S (20% of 40,000 (see above))
NCI share of unrealised profit adjustment
NCI’s share of net assets at the date of consolidation

8,000
(640)
16,560
Rs.

Goodwill
Cost of investment

50,000

Non-controlling interest at acquisition (20% �46,000)

9,200
59,200

Net assets at acquisition (see above)

(46,000)

Recoverable amount of goodwill (given)

13,200

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Financial accounting and reporting II

Example (continued)
Consolidated retained profits:
All of P’s retained earnings

Rs.
200,000

P’s share of the post-acquisition retained earnings of S
(80% of 40,000 (see above))
Unrealised profit adjustment

32,000
(2,560)
229,440

2.5 Unrealised profit – Transfers of non-current assets
One member of a group may sell a non-current asset to another member of the
group.
The company making the sale will recognise a profit or loss on disposal.
The company buying the asset will include the asset at purchase cost in its own
accounts and depreciation will be based on that amount. This cost will be
different to cost to the group.
As far as the group is concerned no transfer has occurred. The group accounts
must reflect non-current assets at the amount they would have been stated at
had the transfer not been made.
Summary of adjustments:


remove profit from the financial statements of the company that made the
sale; and



correct the depreciation charge in the financial statements of the company
that made the purchase.

These two adjustments establish the transferred asset at its cost less
accumulated depreciation to the group.
The double entry is shared to the NCI as appropriate in the consolidated
statement of financial position.


if the sale was to S the NCI would share the depreciation adjustment.



If the sale was from S to H the NCI would share the profit adjustment.

This is best seen with an illustration.

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

Example:
H owns 80% of S.
There was a transfer of an asset within the group for Rs. 15,000 on 1 January
20X3.
The original cost to H was Rs. 20,000 and the accumulated depreciation at the
date of transfer was Rs. 8,000.
Both companies depreciate such assets at 20% per year on cost to the company,
recognising a full year’s depreciation in the year of purchase and none in the year
of sale.
Figures in
Figures if no Adjustment
the
transfer had
required
accounts
been made
Against S’s figures:
Cost

15,000

20,000

5,000 Dr

Accumulated depreciation

(3,000)

(12,000)

9,000 Cr

12,000

8,000

4,000 Cr

3,000

4,000

1,000 Dr

Charge for the year
Against P’s figures:
Profit on disposal
Proceeds
Carrying amount at
disposal (20,000 – 8,000)

15,000
(12,000)
3,000

nil

If the transfer was from H to S – Full journal
Consolidated financial statements

Dr

Income statement (profit on disposal)

3,000

Income statement (depreciation)

1,000

Non-current asset

Cr

4,000

NCI in the statement of financial position

200

NCI in the statement of comprehensive income

200

Being the NCI share of the depreciation adjustment (20% �1,000)
Composite journal if just preparing the
consolidated statement of financial position
Consolidated retained earnings

Dr
3,800

Non-current asset

4,000

NCI in the statement of financial position

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Cr

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200

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Financial accounting and reporting II

Example (continued)
If the transfer was from S to H – Full journal
Consolidated financial statements

Dr

Income statement (profit on disposal)

3,000

Income statement (depreciation)

1,000

Non-current asset

Cr

4,000

NCI in the statement of financial position

600

NCI in the statement of comprehensive income

600

Being the NCI share of the profit adjustment (20% �3,000)
Composite journal if just preparing the
consolidated statement of financial position
Consolidated retained earnings

Dr
3,400

Non-current asset

4,000

NCI in the statement of financial position

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Cr

174

600

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

3

POSSIBLE COMPLICATIONS: AFTER CONSOLIDATION
Section overview


Accounting for goodwill



Negative goodwill and bargain purchases

3.1 Accounting for goodwill
Goodwill is carried as an asset. It is not depreciated or amortised but instead it is
subject to an annual impairment review.
This means that the recoverable amount of goodwill must be estimated on an
annual basis. If the recoverable amount is less than the carrying amount, the
goodwill is written down to the recoverable amount.
The amount of the impairment is included as a charge against profit in the
consolidated statement of comprehensive income.
Example:
P acquired 80% of S when the retained earnings of S were Rs. 20,000.
The values for assets and liabilities in the statement of financial position for S
represent fair values.
A review of goodwill at 31 December 20X1 found that goodwill had been
impaired, and was now valued at Rs. 55,000.
The statements of financial position of a parent company P and its subsidiary S at
31 December 20X1 are as follows:
P (Rs. )
S (Rs. )
Non-current assets:
Property, plant and equipment
Investment in S

408,000
142,000

100,000
-

Current assets

120,000

40,000

670,000

140,000

Share capital
Share premium

100,000
100,000

20,000
50,000

Retained earnings

400,000

60,000

Bank loan

600,000
70,000

130,000
10,000

670,000

140,000

Equity

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Example (continued):
A consolidated statement of financial position as at 31 December 20X1 can be
prepared as follows:
P Group: Consolidated statement of financial position at 31 December 20X1
Rs.
Assets
Goodwill (see working)
55,000
Property, plant and equipment (508 + 100)
508,000
Current assets (120,000 + 40,000)
160,000
Total assets
723,000
Equity
Share capital (P only)
100,000
Share premium (P only)
100,000
Consolidated retained earnings (see working)
417,000
617,000
Non-controlling interest
26,000
643,000
Current liabilities (70,000 + 10,000)
80,000
Total equity and liabilities
723,000

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

Example (continued):
Net assets summary of S
At date of
Consolidation
Acquisition
Share capital

20,000

20,000

Share premium

50,000

50,000

Retained earnings

60,000

20,000

Net assets

130,000

90,000

Post acqn

40,000

Rs.

Non-controlling interest
NCI’s share of net assets at the date of acquisition
(20% �90,000)
NCI’s share of the post-acquisition retained earnings of
S (20% of 40,000 (see above))

18,000

NCI’s share of net assets at the date of consolidation

26,000

8,000

Rs.

Goodwill
Cost of investment

142,000

Non-controlling interest at acquisition (20% �90,000)

18,000
160,000

Net assets at acquisition (see above)

(90,000)
70,000

Write down of goodwill (balancing figure)

(15,000)

Recoverable amount of goodwill (given)

55,000
Rs.

Consolidated retained profits:
All of P’s retained earnings

400,000

P’s share of the post-acquisition retained earnings of S
(80% of 40,000 (see above))
Write down of goodwill (see goodwill working)

32,000
(15,000)
417,000

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Financial accounting and reporting II

2.2 Negative goodwill and bargain purchases
A bargain purchase is a business combination in which the calculation of goodwill
leads to a negative figure.
When this happens the acquirer must then review the procedures used to
measure the amounts recognised at the acquisition date for all of the following:


the identifiable assets acquired and liabilities assumed;



the non-controlling interest in the acquiree (if any); and



the consideration transferred.

Any amount remaining after applying the above requirements is recognised as a
gain in profit or loss on the acquisition date.
This means that in most cases when a bargain purchase occurs, the ‘negative
goodwill’ should be added to the consolidated profit for the group for the year.

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

Practice question
Haidar plc acquired 75% of Saqib Ltd’s ordinary shares on 1 April for an
agreed consideration of Rs. 25 million when Saqib had retained earnings of
Rs. 10,200,000.
The draft statements of financial position of the two companies at 31
December are:
H (Rs. 000 )
S (Rs. 000)
Non-current assets:
Property, plant and equipment
Investment in S
Current assets
Inventory
Accounts receivable
Cash and bank
Total assets
Equity
Share capital
Share premium
Retained earnings

78,540

27,180

25,000

nil

7,450
12,960

4,310
4,330

nil

920

123,950

36,740

30,000

8,000

20,000
64,060

2,000
15,200

114,060

25,200

Bank loan
Current liabilities

1

6,000

Accounts payable and accruals
Bank overdraft

5,920
2,100

4,160
Nil

Taxation

1,870

1,380

9,890

5,540

123,950

36,740

Total equity and liabilities
The following information is relevant
(i)

The fair value of Saqib Ltd’s land at the date of acquisition was Rs. 4 million in
excess of its carrying value. The fair value of Saqib Ltd’s other net assets
approximated to their carrying values.

(ii)

During the year Haidar plc sold inventory to Saqib Ltd for Rs. 2.4 million. The
inventory had originally cost Haidar plc Rs. 2.0 million. Saqib Ltd held 25% of
these goods at the year-end.

(iii)

The two companies agreed their current account balances as Rs. 500,000
payable by Saqib Ltd to Haidar plc at the year-end. Inter-company current
accounts are included in accounts receivable or payable as appropriate.

(iv)

An impairment test at 31 December on the consolidated goodwill concluded
that it should be written down by Rs. 625,000.

Prepare a consolidated statement of financial position as at 31 December.

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SOLUTIONS TO PRACTICE QUESTIONS
1

Solutions
H Group: Consolidated statement of financial position at 31 December 20X1
Rs.
Assets
Goodwill (W3)
Property, plant and equipment (78,450 + 27,180 – 4,000)
Current assets
Inventory (7,450 + 4,310 – 100)

6,225
109,720
115,945
11,660
16,790

Accounts receivable (12,960 + 4,330 – 500)
Cash and bank

920
29,370

Total assets

145,315

Equity
Share capital
Share premium
Retained earnings (W4)
Non-controlling interest (W2)
Non-current liabilities
Current liabilities
Accounts payable and accruals (5,920 + 4,160 – 500)
Bank overdraft
Taxation (1,870 + 1,380)

30,000
20,000
67,085
117,085
7,300
124,385
6,000
9,580
2,100
3,250
14,930

Total equity and liabilities

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Chapter 5: Consolidated accounts: Statements of financial position - Complications

1

Solution: Workings
W1: Net assets summary of S
At date of
Consolidation
Acquisition
Share capital

8,000

8,000

Share premium

2,000

2,000

15,200

10,200

4,000

4,000

29,200

24,200

Retained earnings
Fair value adjustment
Net assets

Post acqn

5,000

Rs.000

W2: Non-controlling interest
NCI’s share of net assets at the date of acquisition
(25% �24,200)

6,050

NCI’s share of the post-acquisition retained earnings of S
(25% of 5,000 (see above))

1,250

NCI’s share of net assets at the date of consolidation

7,300
Rs. 000

W3: Goodwill
Cost of investment

25,000

Non-controlling interest at acquisition (25% �24,200)

6,050
31,050

Net assets at acquisition (see above)

(24,200)
6,850

Write down of goodwill (given)

(625)

Recoverable amount of goodwill

6,225

W4: Consolidated retained profits:

Rs.

All of H’s retained earnings

64,060

Unrealised profit

(100)

H’s share of the post-acquisition retained earnings of S
(75% of 5,000 (see above))
Write down of goodwill (given)

3,750
(625)
67,085

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CHAPTER

Certificate in Accounting and Finance
Financial accounting and reporting II

6

Consolidated accounts:
Statements of comprehensive income
Contents
1 Consolidated statement of comprehensive income
2 Complications

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Financial accounting and reporting II

INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to broaden the knowledge base of basic accounting
acquired in earlier modules with emphasis on International Financial Reporting Standards.
LO 1

Prepare financial statements in accordance with the relevant law of the
country and in compliance with the reporting requirement of the
international pronouncements.

LO1.6.1

Prepare and present a simple consolidated statement of comprehensive
income involving a single subsidiary in accordance with IFRS 10.

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Chapter 6: Consolidated accounts: Statements of comprehensive income

1

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Section overview


Consolidated income statement: the basic rules



Pre- and post-acquisition profits

1.1 Consolidated income statement: the basic rules
The main problems with preparing a consolidated statement of comprehensive
income relate to reporting profit or loss for the period, and this section therefore
focuses on profit or loss items.
A consolidated statement of comprehensive income brings together the sales
revenue, income and expenses of the parent and the sales revenue, income and
expenses of its subsidiaries.
All items of income and expense in the consolidated statement of comprehensive
income are a straight cross cast of equivalent items in the individual financial
statements of the members of the group.
Non-controlling interest
Consolidated financial statements must also disclose the profit or loss for the
period and the total comprehensive income for the period attributable to:


owners of the parent company; and



non-controlling interests.

The figure for NCI is simply their share of the subsidiary’s profit for the year that
has been included in the consolidated statement of comprehensive income.
The amounts attributable to the owners of the parent and the non-controlling
interest are shown as a metric (small table) immediately below the statement of
comprehensive income.
Illustration:
Total comprehensive income attributable to:

Rs.

Owners of the parent (balancing figure)

X

Non-controlling interests (x% of y)

X
X

Where:

x% is the NCI ownership interest
y is the subsidiary’s profit for the year that has been included
in the consolidated statement of comprehensive income

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Example:
Entity P bought 80% of S several years ago.
The income statements for the year to 31 December 20X1 are as follows.
P
Rs.

S
Rs.

Revenue
Cost of sales

500,000
(200,000)

250,000
(80,000)

Gross profit

300,000

170,000

Other income
Distribution costs

25,000
(70,000)

6,000
(60,000)

Administrative expenses
Other expenses

(90,000)
(30,000)

(50,000)
(18,000)

Finance costs

(15,000)

(8,000)

Profit before tax
Income tax expense

120,000
(45,000)

40,000
(16,000)

Profit for the period

75,000

24,000

A consolidated statement of comprehensive income can be prepared as follows:
Working
P

S

Consolidated

Revenue

Rs.
500,000

Rs.
250,000

Rs.
750,000

Cost of sales

(200,000)

(80,000)

(280,000)

Gross profit
Other income

300,000
25,000

170,000
6,000

470,000
31,000

Distribution costs
Administrative
expenses

(70,000)

(60,000)

(130,000)

(90,000)

(50,000)

(140,000)

Other expenses
Finance costs

(30,000)
(15,000)

(18,000)
(8,000)

(48,000)
(23,000)

Profit before tax

120,000

40,000

160,000

Income tax expense

(45,000)

(16,000)

(61,000)

Profit for the period

75,000

24,000

99,000

Total comprehensive income attributable to:
Owners of the parent (balancing figure)

94,200

Non-controlling interests (20% of 24,000)

4,800
99,000

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Chapter 6: Consolidated accounts: Statements of comprehensive income

1.2 Pre- and post-acquisition profits
Only post acquisition profits are consolidated. When a parent acquires a
subsidiary during a financial year, the profits of the subsidiary have to be divided
into pre-acquisition and post-acquisition profits.
Example:
Entity P acquired 80% of S on 1 October 20X1.
The acquisition date was 1 October. This means that only 3/12 of the subsidiary’s
profit for the year is post-acquisition profit.
The income statements for the year to 31 December 20X1 are as follows.
P
Rs.

S
Rs.

Revenue
Cost of sales

400,000
(200,000)

260,000
(60,000)

Gross profit
Other income

200,000
20,000

200,000
-

Distribution costs

(50,000)

(30,000)

Administrative expenses

(90,000)

(95,000)

Profit before tax

80,000

75,000

Income tax expense

(30,000)

(15,000)

Profit for the period

50,000

60,000

A consolidated statement of comprehensive income can be prepared as follows:
Working
P
Rs.

S (3/12)
Rs.

Consolidated
Rs.

Revenue

400,000

65,000

465,000

Cost of sales

(200,000)

(15,000)

(215,000)

Gross profit

200,000

50,000

250,000

Other income
Distribution costs

20,000
(50,000)

–
(7,500)

20,000
(57,500)

Administrative
expenses

(90,000)

(23,750)

(113,750)

Profit before tax
Income tax expense

80,000
(30,000)

18,750
(3,750)

98,750
(33,750)

Profit for the period

50,000

15,000

65,000

Total comprehensive income attributable to:
Owners of the parent (balancing figure)

62,000

Non-controlling interests (20% of 15,000)

3,000
65,000

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Financial accounting and reporting II

2

COMPLICATIONS
Section overview


Inter-company items



Fair value adjustments



Impairment of goodwill and consolidated profit

2.1 Inter-company items
Consolidated income statements are prepared by combining the information
given in the income statements of the individual companies.
It is usually necessary to make adjustments to eliminate the results of intercompany trading. This includes adjustments to cancel out inter-company trading
balances and unrealised profit.
Inter-company trading
Inter-company trading will be included in revenue of one group company and
purchases of another. These are cancelled on consolidation.
Illustration:
Debit
Revenue

X

Cost of sales (actually purchases within cost of sales)

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Chapter 6: Consolidated accounts: Statements of comprehensive income

Example:
P acquired 80% of S 3 years ago.
During the year P sold goods to S for Rs. 50,000.
By the year-end S had sold all of the goods bought from P to customers.
Extracts of the income statements for the year to 31 December 20X1 are as
follows.
P

S

Revenue

Rs.
800,000

Rs.
420,000

Cost of sales

(300,000)

(220,000

Gross profit

500,000

200,000

The adjustment in respect of inter-company trading can be shown as
follows:
Workings
P
Rs.(000)

S
Rs.(000)

Dr
Rs.(000)
(50)

Revenue

800

420

Cost of sales

(300)

(220)

Gross profit

500

200

(50)

Cr
Rs.(000)

Consol.
Rs.(000)
1,170

50

(470)

50

700

The adjustment has no effect on gross profit.
Unrealised profits on trading
If any items sold by one group company to another are included in inventory (i.e.
have not been sold on outside the group by the year end), their value must be
adjusted to lower of cost and net realisable value from the group viewpoint (as for
the consolidated statement of financial position).
This is an inventory valuation adjustment made in the consolidated financial
statements.
Illustration:
Closing inventory – Statement of comprehensive income
Closing inventory – Statement of financial position

Debit
X

Credit
X

The adjustment in the statement of comprehensive income reduces gross profit
and hence profit for the year. The NCI share in this reduced figure and the
balance is added to retained earnings. Thus, the adjustment is shared between
both ownership interests.

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Financial accounting and reporting II

Example:
P acquired 80% of S 3 years ago.
During the year P sold goods to S for Rs. 50,000 at a mark-up of 25% on cost.
This means that the cost of the goods to P was Rs. 40,000 (100/125 × Rs. 50,000)
and P made a profit of Rs. 10,000 000 (25/125 × Rs. 50,000) on the sale to S.
At the year-end S still had a third of the goods in inventory.
This means that S still held goods which it had purchased from P for Rs. 15,000
at a profit to P of Rs. 3,000. The Rs. 3,000 is unrealised by the group as at the
year-end.
Extracts of the income statements for the year to 31 December 20X1 are as
follows.
Revenue

P (Rs.)
800,000

S (Rs.)
420,000

Cost of sales

(300,000)

(220,000

Gross profit

500,000

200,000

The adjustments in respect of inter-company trading1 and unrealised
profit2 can be shown as follows:
Workings
P
Rs.(000)

S
Rs.(000)

Dr
Rs.(000)

Cr
Rs.(000)

Consol.
Rs.(000)

Revenue
Cost of sales

800
(300)

420
(220)

(50)1
(3)2

501

1,170
(473)

Gross profit

500

200

(53)

50

697

The adjustment in respect of inter-company trading1 has no effect on gross
profit.
The adjustment in respect of and unrealised profit2 reduces gross profit.

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Chapter 6: Consolidated accounts: Statements of comprehensive income

If the sale is from S to P the unrealised profit adjustment must be shared with the
NCI.
Example:
P acquired 80% of S 3 years ago.
During the year S sold goods to P for Rs. 50,000 at a mark-up of 25% on cost.
This means that the cost of the goods to S was Rs. 40,000 (100/125 × Rs. 50,000)
and S made a profit of Rs. 10,000 000 (25/125 × Rs. 50,000) on the sale to S.
At the year-end P still had a third of the goods in inventory.
This means that P still held goods which it had purchased from S for Rs. 15,000
at a profit to S of Rs. 3,000. The Rs. 3,000 is unrealised by the group as at the
year-end. The NCI’s share of the unrealised profit adjustment is Rs. 600 (20% ×
Rs. 3,000)
Extracts of the income statements for the year to 31 December 20X1 are as
follows.
P (Rs.)

S (Rs.)

Revenue
Cost of sales

800,000
(300,000)

420,000
(220,000

Gross profit

500,000

200,000

Expenses

(173,000)

(123,000)

Profit before tax

327,000

77,000

The adjustments in respect of inter-company trading1 and unrealised
profit2 can be shown as follows:
Workings

Revenue

P

S

Dr

Cr

Rs.(000)
800

Rs.(000)
420

Rs.(000)
(50)1

Rs.(000)

Consol.
Rs.(000)
1,170

Cost of sales

(300)

(220)

(3)2

501

(473)

Gross profit

500
(173)

200
(123)

(53)

50

697
(296)

427

77

(53)

50

401

The adjustment in respect of and unrealised profit2 reduces gross profit and
is shared with the NCI.
Total comprehensive income attributable to:
Owners of the parent (balancing figure)
Non-controlling interests (20% × 77,000) − 600)

Rs.(000)
386.2
14.8
401.0

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Financial accounting and reporting II

Inter-company management fees and interest
All other inter-company amounts must also be cancelled.
Where a group company charges another group company, management
fees/interest, there is no external group income or external group expense and
they are cancelled one against the other like inter-company sales and cost of
sales.
Illustration:
Debit
Income (management fees)

Credit

X

Expense (management charges)

X

Example:
P acquired 80% of S 3 years ago.
Other income in P’s statement of comprehensive income includes an intercompany management charge of Rs. 5,000 to S. S has recognised this in
administrative expenses.
Extracts of the income statements for the year to 31 December 20X1 are as
follows.
P

S

Revenue

Rs.
800,000

Rs.
420,000

Cost of sales

(300,000)

(220,000)

Gross profit
Administrative expenses

500,000
(100,000)

200,000
(90,000)

Distribution costs
Other income

(85,000)
12,000

(75,000)
2,000

Profit before tax

327,000

37,000

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Chapter 6: Consolidated accounts: Statements of comprehensive income

Example continued
The adjustments in respect of inter-company management charge can be
shown as follows:
Workings

Revenue

P

S

Dr

Cr

Rs.(000)
800

Rs.(000)
420

Rs.(000)

Rs.(000)

Consol.
Rs.(000)

1,220

Cost of sales

(300)

(220)

(520)

Gross profit
Administrative
expenses
Distribution
costs
Other income

500

200

700

(100)

(90)

(85)

(75)

12

2

327

37

Profit before
tax

5

(185)
(160)

(5)

9
364

The adjustment in respect of inter-company management charge has no
effect on gross profit.
Inter-company dividends
The parent may have accounted for dividend income from a subsidiary. This is
cancelled on consolidation.
Dividends received from a subsidiary are ignored in the consolidation of the
statement of comprehensive income because the profit out of which they are paid
has already been consolidated.

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Financial accounting and reporting II

2.2 Fair value adjustments
Depreciation is charged on the carrying amount of assets.
If a depreciable asset is revalued on consolidation the depreciation stream that
relates to that asset will also need to be revalued.
This adjustment is carried out in the financial statements of the subsidiary. It will
affect the subsidiary’s profit after tax figure and therefore will affect the NCI.
Example:
P acquired 80% of S 3 years ago.
At the date of acquisition S had a depreciable asset with a fair value of Rs.
120,000 in excess of its book value. This asset had a useful life of 10 years at the
date of acquisition.
This means that the group has to recognise extra depreciation of Rs. 36,000 (Rs.
120,000/10 years × 3 years) by the end of this period. One year’s worth of this (Rs.
12,000) is recognised in S’s statement of comprehensive income prior to
consolidation this year.
Extracts of the income statements for the year to 31 December 20X1 are as
follows.
P

S

Revenue

Rs.
800,000

Rs.
420,000

Cost of sales

(300,000)

(220,000)

Gross profit

500,000

200,000

Expenses

(173,000)

(163,000)

Profit before tax

327,000

37,000

The adjustments in respect of extra depreciation can be shown as follows:
Workings

Revenue

P

S

Dr

Cr

Rs.(000)
800

Rs.(000)
420

Rs.(000)

Rs.(000)

Consol.
Rs.(000)

1,220

Cost of sales

(300)

(220)

(520)

Gross profit

500

200

700

Expenses
Adjustment

(173)

(163)
(12)

(348)

327

25

352

Profit before
tax

The adjustment in respect of the extra depreciation reduces the profit of S
that is consolidated.

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Chapter 6: Consolidated accounts: Statements of comprehensive income

2.3 Impairment of goodwill and consolidated profit
When purchased goodwill is impaired, the impairment does not affect the
individual financial statements of the parent company or the subsidiary. The
effect of the impairment applies exclusively to the consolidated statement of
financial position and the consolidated income statement.
If goodwill is impaired:


it is written down in value in the consolidated statement of financial position,
and



the amount of the write-down is charged as an expense in the consolidated
income statement (normally in administrative expenses).

Example:
P acquired 80% of S 3 years ago.
Goodwill on acquisition was Rs. 200,000.
The annual impairment test on goodwill has shown it to have a recoverable
amount of only Rs. 175,000. Thus a write down of Rs. 25,000 is required.
Extracts of the income statements for the year to 31 December 20X1 are as
follows.
P

S

Revenue

Rs.
800,000

Rs.
420,000

Cost of sales

(300,000)

(220,000)

Gross profit
Expenses

500,000
(173,000)

200,000
(163,000)

Profit before tax

327,000

37,000

The adjustment in respect of inter-company trading1 and unrealised
profit2 can be shown as follows:
Workings
P
Rs.(000)

S
Rs.(000)

Dr
Rs.(000)

Cr
Rs.(000)

Consol.
Rs.(000)

Revenue
Cost of sales

800
(300)

420
(220)

1,220
(520)

Gross profit

500

200

700

Expenses

(173)

(163)

(25)

(361)

Profit before
tax

327

37

(25)

339

The adjustment in respect of the goodwill reduces the consolidated profit.
(There is no impact on NCI).

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Financial accounting and reporting II

1

Practice question

P acquired 80% of S 3 years ago. Goodwill on acquisition was 80,000. The
recoverable amount of goodwill at the year-end was estimated to be 65,000. This
was the first time that the recoverable amount of goodwill had fallen below the
amount at initial recognition.
S sells goods to P. The total sales in the year were 100,000. At the year-end P
retains inventory from S which had cost S 30,000 but was in P’s books at 35,000.
The distribution costs of S include depreciation of an asset which had been
subject to a fair value increase of 100,000 on acquisition. This asset is being
written off on a straight line basis over 10 years.
The income statements for the year to 31 December 20X1 are as follows.
P
Rs.(000)
1,000

Revenue

S
Rs.(000)
800

Cost of sales

(400)

(250)

Gross profit
Distribution costs

600
(120)

550
(75)

(80)

(20)

Administrative expenses

400

455

Dividend from S

80

-

Finance cost

(25)

(15)

Profit before tax

455

Tax

(45)

Profit for the period

410

440
(40)
400

Prepare the consolidated income statement for the year ended 31
December.

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Chapter 6: Consolidated accounts: Statements of comprehensive income

SOLUTIONS TO PRACTICE QUESTIONS
1

Solutions
Consolidated statement of comprehensive income for the year ended 31 December.
Workings

Revenue

P

S

Dr

Cr

Consol.

Rs.(000)
1,000

Rs.(000)
800

Rs.(000)
(100)

Rs.(000)

Rs.(000)

100

(555)

100

1,145

Cost of sales

(400)

(250)

3(5)

Gross profit

600

550

(105)

Distribution costs

(120)

(75)

Fair value adjustment
Administrative
expenses

1,700

1(10)

(120)

(85)

(80)

(20)

400

(205)
2(15)

(115)

445

Dividend from S
Finance cost

80
(25)

(15)

Profit before tax
Tax

455
(45)

430
(40)

Profit for the period

410

390

(80)
(40)
785
(85)
(200)

100

Total comprehensive income attributable to:
Owners of the parent (balancing figure)

700

Rs.(000)

633

Non-controlling interests (20% of 390,000) − (20% of 35,000)

77
700

Notes:
1: Extra depreciation on fair value adjustment (100/10 years)
2: Goodwill impairment
3: Unrealised profit

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